The Role of Regulatory Authorities

The following comments are confined to the role of oil and gas regulatory authorities in Alberta. The Freehold Owners Association has not yet researched the role of regulatory authorities in other Canadian jurisdictions.

For almost three quarters of a century, all oil and gas industry operations in Alberta have been regulated by the Alberta Energy Regulator (formerly known as the “Energy Resources Conservation Board”) and its predecessors (collectively the "Board") under terms of the Oil and Gas Conservation Act (the "Act"). The Board has “exclusive jurisdiction to examine, inquire into, hear and determine all matters and questions”1 arising under the Act, and broad discretionary authority to:

"make any just and reasonable orders and directions the Board considers necessary to effect the purposes of this Act and that are not otherwise specifically authorized by this Act”2

In ‘Alberta’s Petroleum Industry and the Conservation Board’, a comprehensive, Board-authorized, 800-page history of the pre-1960 Board, Professor David H. Breen applauds the wisdom of early Alberta public servants who convinced “cautious Alberta politicians to accept the idea that it was necessary for the state to supervise oilfield development and production in the public interest”3, and drafted legislation which charged the Board with the dual responsibility of enforcing conservation and “assuring each owner the opportunity of obtaining his just and equitable share of the production of any pool”.4 (emphasis added).

Many Alberta freeholders assume that the Board is protecting their interests. This assumption is, or at least was, shared by one of Canada’s foremost legal writers, the late John B. Ballem Q.C., who asserted in 1964 that:

“... the importance of protection of the mineral owner's rights and property is manifested by an express declaration that one of the objects of conservation legislation is to promote equitable sharing among owners of the resource.The legislatures do not refer to fiduciary relationships but the undoubted effect of the legislation is to require the mineral lessee to conduct himself for the purposes of the lease as though he were a fiduciary in the strictest sense. Because of the protection afforded to the lessor by the legislation, and also because of the express terms of the well-standardized mineral lease, it is submitted that it is unlikely that the courts will be required to devote much attention to the fiduciary relationship between the lessee and the lessor.”5 (emphasis added)

A fiduciary owes a duty of loyalty to its beneficiary and, if the fiduciary finds itself in a position where its own interests conflict with its duties to its beneficiary, it must honour its duties to its beneficiary. If a fiduciary acts in its own interests, the fiduciary is liable for the profits it makes in choosing against the interests of its beneficiary6.

The Board has always operated under the assumption that oil company-lessees will protect the interests of their freehold owner-lessors7. But an assumption differs from a requirement. For a number of years it has been the Board’s position that, if its assumptions are incorrect and an energy company-lessee has not protected the interests of its freehold owner-lessor, it has no jurisdiction to become involved and the matter is a contractual dispute between the oil company-lessee and the freehold owner-lessor which belongs in the courts.

Individual freehold owners in Alberta are left with the worst of all possible worlds.

Based on the Board’s assumption that oil company-lessees will protect the interests of their freehold owner-lessors, the Board frequently makes decisions and orders respecting applications by oil company-lessees without notice to, or input from, freehold owner-lessors whose property rights may be impacted. The Board has exclusive jurisdiction in respect of technical matters and decisions and orders of the Board are final and may only be appealed to the Alberta Court of Appeal on questions of law or jurisdiction9. This means that if the Board’s assumption proves to be incorrect, if the oil company-lessee acts under the authority of the Board order and damages its freehold owner-lessor’s property, and if the freehold owner-lessor seeks recourse through the courts, the courts have no jurisdiction to question or overturn the Board’s order and the oil company-lessee may justify its actions on the basis of the Board order and effectively ‘hide behind’ the very legislation which, at least initially, was designed to provide all owners with justice and equity.

And it gets worse, even in situations where the issue raised by a freeholder is entirely technical, the Board is reluctant to become involved if the issue potentially impacts an energy company’s lease (see “The Capable of Producing Issue”)

The portion of Alberta conservation legislation referred to by both Professor Breen and Mr. Ballem was Section 4(d) of the Oil and Gas Conservation Act which then stated that:

“4. The intent and purpose of this Act are:...(d) to afford each owner the opportunity of obtaining his just and equitable share of the production of any pool.”8 (emphasis added)

In 1969, the above highlighted reference to “just and equitable” was dropped.

In ‘Alberta’s Petroleum Industry and the Conservation Board’, Professor Breen recognized the threat that the oil and gas industry lobby poses to the integrity of oil and gas regulators. In comparing American oil and gas regulatory agencies with the pre-1960 Board, he posed the following question:

“Not long after its creation, it seems that a typical agency is inevitably co-opted by the industry it was designed to regulate. Professional regulators soon come to see and interpret the world through eyes similar to those of the regulated industry. Differences come to be more of detail than substance. Does the history of the AER (formerly known as the “ERCB”) lend confirmation to this recognized pattern?”10

Professor Breen concluded that the pre-1960 Board had successfully resisted challenges from major oil companies11 and industry associations12 and remained independent due, in large part, to the technical prowess and integrity of its members and the political support provided to the Board during its formative years by long-time Alberta Premier Ernest C. Manning13.

There are 8 brief references to freehold ownership in Professor Breen’s 800-page history of the pre-1960 Board. The longest and perhaps the most telling is:

“Also of immense benefit to the Board in the initiation of conservation measures, and in distinct contrast to the situation in the United States, was that mineral rights throughout the province were mainly in possession of the Crown. Hence, there were not thousands of farmers and other holders of subsurface rights clamouring for production allowances, and this minimized the prospect of broad public challenge to the Board’s fiat.”14

In fact, there are tens of thousands of farmers and other holders of subsurface rights in Alberta. Like most Canadians, freehold owners do not want to be perceived as clamouring for their own self-interest in the face of measures taken for the greater good of society. The Freehold Owners Association strongly supports Board-initiated conservation measures taken for the greater good of all Albertans, irrespective of whether these measures adversely impact freehold owners.

However in recent years, the Board appears to have become more focussed on facilitating oil and gas industry activity than fulfilling its mandate to afford ‘each owner the opportunity of obtaining his share of the production of any pool’. Industry activity is clearly important to the economy of Alberta but should fairness and equity be sacrificed on the altar of industry activity (see “Target Areas”)?.

Would the answer to the question posed by Professor Breen regarding the co-opting of the pre-1960 Board by the energy industry be the same if it was asked today with respect to the current Board?